AI Drafter 
TaxTMI 
TaxTMI 
2022 (3) TMI 1511
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....ecovery of expenses to/from its AEs. (We shall discuss the functions performed under each of the segments while discussing the adjustment determined by the TPO). In the TP study maintained for the year under consideration, the Assessee treated all the international transactions as being at arm's length. During the year, the Assessee also recovered certain advertisement expenses from Intel USA ("Intel") and Microsoft USA ("Microsoft"). Since the transactions were with unrelated parties, the assessee did not benchmark the same. During the course of assessment proceedings, reference was made to the Transfer Pricing Officer (TPO). The TPO passed an order dated 29.01.2013 under Section 92CA of the Income-tax Act, 1961 ("the Act") determining a TP adjustment aggregating to Rs. 250,07,40,281/-, comprising of the following: A. Adjustment of Rs. 53,91,00,000/- determined in the trading segment by ignoring the segmental details along with reconciliation with the financials provided by the Assessee and completely ignoring the installation revenue which according to the assessee, was an integral component of the sales effected in the trading segment; B. TP adjustment determin....
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....ices segment. b) The learned AO / learned TPO erred in rejection of comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters in determining the arm's length price. c) The learned AO / learned TPO erred in including the following companies that do not satisfy the test of comparability and should be rejected. * Infosys BPO Ltd *Accentia Technologies Ltd *Cosmic Global Ltd * Eclerx Services Ltd d) The learned AO / learned TPO erred in the computation of mark-up for Allsec Technologies Limited. The learned TPO has erroneously considered the provision for bad and doubtful debts as non-operating in nature. e) Having accepted that the appellant is a limited risk contract support service provider, the learned AO / learned TPO erred in not providing appropriate adjustment towards the risk differential, when the com parables selected are full - fledged entrepreneurial companies. 8.1.2 Marketing Support Services a) The learned AO / learned TPO erred in arbitrarily arriving at segmental profit with respect of Marketing suppo....
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....se or DRP proceeding. 13. Disallowance of depreciation on assets supplied on lease and taxation of future lease rentals - Rs. 17,783,741 and 29,313,022 *The learned AO and the Hon'ble DRP erred in holding the lessee as the owner or the assets for claiming depreciation on the same. *The learned AO and the Hon'ble DRP has erred in not placing reliance on the decision of the Hon'ble Supreme Court in the case of ICDS Ltd. vs. Commissioner of Income Tax. Mysore & Anr (2012-ITS -01-SC) 14. Disallowance of Provision for Warranty and Warranty expenses - Rs. 821,556,000 A. Disallowance of Provision for warranty - Rs. 57.40 crores *The learned AO has erred in not placing reliance on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd vs. Commissioner or Income Tax (SC) [2009] 80 Taxmann 422. B. Warranty Expenses - Rs.24.76 crores *The learned AO and the Hon'ble DRP erred in disallowing the warranty expenses of Rs.24.76 crores without considering the details submitted during DRP proceedings. 15. Unexplained expenditure A. Freight - Rs. 376,642,988 ....
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....ROUND 7.1) 6. The Assessee imports and sells to third party customers in India, computers, hardware, peripherals, etc., which are manufactured by its AEs. The Assessee also provides local installation, commissioning and post-warranty, and maintenance support services to the customers. The Net markup on cost earned by the Assessee (as per the TP study) are as follows:- Total Income Rs. 4,81,69,81,000/- Total Cost Rs. 4,73,22,43,000/- Profit Rs. 8,47,38,000/- Margin over cost 1.79% 6.1 The Assessee had submitted to the TPO by reconciling the segmental details with the financials (refer page 5566 of the paperbook-Vol.12), wherein the net mark up on cost was 2.23%. The details of the same are as follows:- Total Income Rs. 6,22,30,99,230/- Total Cost Rs. 6,08,74,11,808/- Profit Rs. 13,56,87,422/- Margin over cost 2.23% 6.2 The Comparison of the benchmarking approach adopted by the Assessee and TPO are as follows:- Particulars Assessee TPO Methodology adopted Transaction Net Margin Method ('TNMM') TPO accepted the method, the PLI and the comparables selected by the Assessee. (refer page 15 of the TP Order) Prof....
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....ost and revenue: The DRP observed that the Assessee has not reconciled the figures and therefore the action of the TPO was upheld. - Re-exclusion of Rs. 40 crores from the total cost: The Assessee submitted that the TPO has included cost to the extent of Rs. 40 crores which pertains to the technical and marketing support services segment and was recovered with a mark-up from the AEs. While the DRP observed that once the services are segregated, cost related to such other service should not be included in the cost for trading segment, since it was not clear whether the expenses are included, it directed the TPO to examine the same, and exclude it if the expenses are included. - Re-adoption of incorrect depreciation cost: The DRP observed that the cost allocated by the TPO was lesser than the cost allocated by the Assessee and directed the TPO to examine the same and adopt the correct value. 6.6 Pursuant to the DRP's directions, final assessment order was passed. Despite the directions issued by the DRP to have a relook at some of the items to arrive at the segmental margin, effect to the same was not given in the final assessment order and the adjustment origina....
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....bmission reiterating the reasoning of TPO and DRP. (The Revenue in its appeal vide ground 2 challenges the DRP's directions to adopt the figure of Rs.2.99 crore as depreciation cost in trading. This ground of the Revenue, we shall deal in Revenue's appeal). 6.9 We have heard rival submissions and perused the material on record. Since the assessee's transfer pricing study was inconsistent with its financials, the TPO had proposed to recast segmental details of trading segment vide notice dated 11.01.2013. The assessee filed its reply admitting mistakes (reply dated 25.01.2013) and furnished the segmental details reconciling the financials. The reconciled segmental details with financials are placed at page 556 of the paper book Vol.2. For ready reference, the reconciled segmental details with the financials of the assessee is reproduced below:- Particulars Trading Segment Manufacturing Segment Marketing and Technical Support Segment Total Revenue Sale of traded items 5,44,72,87,852 24,51,54,28,430 29,96,27,16,282 Less: Duty (6,05,29,065) (1,98,09,13,045) (2,04,14,42,110) Net S....
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....tion Operating Profit as computed 23,18,30,322 Other Income 1,05,87,05,000 Less: Provision for Doubtful Advances 5,22,13,000 Provision for Doubtful Debts 60,79,04,000 Balance with customs written off 9,19,34,000 Loss on sale of fixed assets 1,19,000 Exchange Loss 1,11,09,53,000 Loss on cancellation of forward contracts 1,10,73,000 Interest 7,99,91,000 Depreciation related to MSS not considered in above computation - Profit before tax (66,36,51,678) 6.9.1 The above reconciled segmental details is seen not considered by the TPO and she proceeded to recast the segmental details without assigning any reasons for rejecting the assessee's reconciled segmental details. The assessee in the trading segment provides in....
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.... 17.12.2008, Sl. Nos. 26 and 41 of invoice dated 17.12.2008). It is to be mentioned that the assessee in its applications for admission of additional evidence has given the reasons why the same could not be produced before the A.O. during the course of assessment. The additional evidences now produced before the ITAT are necessary document / evidence to prove that installation revenue is integral part of the trading segment. Therefore, for substantial cause and justice, the additional evidence produced vide assessee's applications dated 17.03.2020 and 24.02.2021 are admitted on record. In the TPO's order, the installation revenues are not allocated to any of the segments and thus has been completely ignored which is incorrect. According to the assessee, the installation revenues are attributable only to the manufacturing and trading segments of the Assessee as there can be no installation services in the other segment, viz., technical and marketing support services rendered to the AEs. Moreover, while the TPO took into account the costs incurred in this regard, she failed to allocate the installation revenues to the trading segment. This has resulted in a skewed operating margin. I....
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.... aforesaid anomalies. The transfer pricing adjustment in trading segment is set aside. The matter is restored to the files of A.O. / T.P.O. for fresh TP analysis taking into account the above mentioned mistake pointed out. In other words, the TPO is directed to consider the assessee's reply dated 25.01.2013 vide which it had furnished the segmental details reconciled with the financials. It is ordered accordingly. 6.9.5 In the result, ground 7.1 is allowed for statistical purposes. B. TECHNICAL AND MARKETING SUPPORT SERVICES SEGMENT (T.P.ADJUSTMENT) [GROUND 8, 8.1, 8.1.2, 9(a), and 9(b)] 7. The Assessee renders technical and marketing support services to the AEs in respect of their direct sales made by the AEs to customers in India. Under this segment, following services are performed:- (i) Interacting with the existing and prospective clients of the AEs in India, understanding their needs for IT hardware and communicating the same to the AEs. (ii) Communicating the price to the customer based on the price band provided by its AEs. (iii) The AEs has contractual obligation to provide warranty services to its customers in India. The Assessee suppor....
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....ing recovery of expenses from Intel and Microsoft towards advertisement as part of the cost base of the MSS segment, and adding a mark-up thereon. 7.5 Aggrieved by the TPO's order, assessee filed objection before the DRP. The Assessee's objections on the aforesaid adjustments made by the TPO were rejected by the DRP in toto and the TPO's action was upheld. Pursuant to the DRP's directions, TP adjustment made by the TPO was incorporated in the final assessment order. 7.6 Aggrieved, assessee is in appeal before the ITAT. The issue / grounds raised in Technical and marketing support services segment are as follows:- (a) Bifurcation of this segment into ITES and MSS segment ( assessee's ground 8, 8.1) (b) Allocation cost at 50% to each of the segments and allocating 100% of the profits to ITES segment [assessee's ground 8.1.1 (a) and 8.1.2(a)] (c) Selection of comparable companies in ITES and MSS segment by TPO [assessee's ground 8.1.1(e) and assessee's additional ground 1] (d) Reconsidering recovery of expenses from Intel and Microsoft towards advertisement as part of the cost base of the MSS segment and adding a mark up [ground 9(a) and 9(b) ....
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.... (ix) remote maintenance; (x) revenue accounting; (xi) support centres; (xii) website services; (xiii) data search integration and analysis; (xiv) remote education excluding education content development; or (xv) clinical database management services excluding clinical trials, but does not include any research and development services whether or not in the nature of contract research and development services;" (vi) Evidently, merely because services are rendered using IT medium, they cannot be termed as ITES. Therefore, the arbitrary bifurcation of the services into ITES and MSS ought to be set aside. The functions performed in the technical and marketing services segment as set out in TP study at pages 5642-5644 of the paperbookVol.12 does not indicate that any ITES are provided. Reliance is also placed on the additional evidence filed on 24.02.2021 whereunder the agreements entered into by the Assessee with its AEs for rendering the marketing support services are produced, a reading of which shows that there is no ITES being provided to the AE. (vii) Even if the services rendered are considere....
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....o prove certain technical support to the customers who purchase products from the assessee, to provide logistics support to ensure delivery of products and services to the customers and also provide marketing support and Sales promotion services. The technical services are provided to the customers of products, and as such cannot be compared to the function of provision of ITES service. Therefore. we are no in agreement with the TPO's view in comparing such services to call entre activity, and there is no information for the TPO to take such a view. Besides, we note that all these functions is provision of logistics support, marketing support and technical support have interrelation in the facts & circumstances of the case. Therefore, it would not be appropriate to segregate them into Technical Services & Marketing Supports services. Accordingly, the TPO's action in such segregated analysis is disapproved. The TPO is directed to consider the Marketing support and Technical Support as an integrated function and such integrated revenue of these two activities may be benchmarked as Marketing Support Service. Accordingly, the TPO's benchmarking analysis with regard to ....
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....ulfill their warranty obligations in respect of the sales made by them. For the support services, the Assessee was compensated at a markup of 5% on costs (as part of the technical and marketing support services segment). It was stated that the cost of the spares utilized for discharging the warranty obligations including the freight charges in connection therewith are borne by the AE. 8.1 The TPO was of the view that the Assessee had not taken note of warranty expenses while arriving at the margin of the technical and marketing support services and was of the view that no mark-up was received on expenses incurred in relation to support provided for the AE's warranty obligation. Proceeding on this basis that some portion of the warranty expenses of Rs. 211.41 crores (wrongly considered as Rs. 268.81 crores in the TP Order, after adding the amount of provision of Rs. 57.39 crore again) pertained to the MSS segment, the TPO computed an adjustment of Rs. 16.11 crores as the price of warranty services provided to the AEs. The TPO held that the expenses incurred towards technical and marketing services of Rs. 40.03 crores as a percentage of total cost base of Rs. 738.78 crores comes t....
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....ssessee had submitted that the amount of Rs. 211.42 crores does not pertain to the sales made by AEs in India and that it pertains solely to the sales made by the Assessee. This fact is not disputed. The DRP's directions was for the Assessee to show that the expenses in relation to providing support services for the AE's warranty obligations are either reduced from the costs or accounted for separately. It is evident from Schedule 13 to the accounts that the entire expenses incurred in rendering the technical and marketing support services (including costs in relation to the support services) of Rs. 40.31 crores are reduced from the total operating expenses incurred by the Assessee (please see page 6281 read with page 6309 of the paperbook-Vol.13) and a mark-up of 5% is charged on Rs. 40.31 crores. Since the TPO has not disputed that the warranty expenses of Rs. 211.42 crores pertains only to the sales made by the Assessee, the TPO ought to have deleted the adjustment. (iii) The DRP in fact directed that since the services in relation to the warranty obligations are provided by third party services providers, and the Assessee is only coordinating for the same, no mark-up i....
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....t to tax the difference between the amount debited to P&L Account and the amount for which details of tax deducted at source was furnished. The A.O. held that taxes have not been deducted on the difference and thus made a disallowance of Rs. 55,30,36,094 by section 40(a)(ia) of the I.T.Act. 9.1 Aggrieved, the assessee filed objection before the DRP. The DRP directed the AO to verify the details submitted by the assessee and that wherever tax has been deducted, the claim of the assessee was to be allowed. The DRP also directed the AO to verify as to whether to the extent of Rs. 10,38,82,844/- there had been a double disallowance. In the final assessment order, the AO did not consider the details submitted by the assessee (at page 57) holding that sufficient opportunity had been given. 9.2 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the learned AR are as follows:- (i) Firstly, it is submitted that to the extent of Rs. 10,38,82,844/- the assessee had already disallowed the same in its computation of income and therefore, there is a double disallowance to that extent, which although the DRP had directed the AO to verify, no verificati....
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....n noticed by the DRP and the DRP in its order had specifically directed the A.O. to verify the same. The assesee had produced additional evidence vide its petition dated 05.11.2018. The additional details for an amount of approximately Rs.23.10 crore has been submitted along with the ledger extracts and details of the TDS wherever it is applicable. The additional evidence now produced before the Tribunal are necessary material for proper adjudication of the issue. Therefore, for substantial cause and justice, we take on record the additional evidence now produced before the Tribunal. 9.4.1 The gist of the learned AR's submission is that on considering the additional evidence together with the details submitted to the A.O., it is clear that all amounts debited to the profit and loss account, has been either subjected to TDS or amounts are in such a nature which does not require tax deduction at source. The learned AR has filed a reconciliation, which is as under:- Particulars Amount disallowed by AO u/s 40(a)(ia) Amount voluntarily disallowed u/s 40(a)(ia) not considered by AO Amount for which details were filed before the AO but not considered in order Amount for ....
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....Since the AO has not verified the same, AO is directed to verify the above factual contentions of the assessee and if TDS has been deducted then the claim of the assessee is to be allowed to that extent. The AO is also directed to verify the claim that the assessee had already disallowed an amount of Rs.103,882,844 under section 40(a)(ia) for non-deduction of TDS in relations to the expenses disallowed by the AO. 11.3 However the claim of the assessee that since the assessee has provided substantial amount of information and therefore the disallowance cannot be made is not acceptable. It is the onus heavily cast on the assesee to prove by demonstrative evidence that the statutory obligation of tax deduction on eligible expenses has been discharged by the assessee. Therefore the assessee will produce all the necessary documents to show that tax has been deducted on all the expenses on which deduction of tax is required as per the Income Tax Act, 1961. If the assessee fails to do so, the addition will survive to the extent of non-furnishing of evidence." 9.4.3 The above directions of the DRP, we are in consonance with and the entire issue raised in ground 11 needs to be r....
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....dditional submission, a reconciliation was given. The DRP while directing the AO to verify the contention as regards payment on account of reverse charge mechanism, failed to appreciate the additional submission filed by the assessee. In the final assessment order, the AO did not consider any of the details submitted by the assessee (at page 56) holding that the ledger account extracts had not been submitted. 10.3 Aggrieved, the assessee has raised this issue before the ITAT. The contention of the learned AR are summarized as follows:- * The AO grossly erred in relying on service tax returns for the purposes of assessing the income of the assessee as the point of taxation under service tax and income tax are entirely different. * The assessee had provided a detailed reconciliation between the service tax return and the income as per the P&L Account in its additional submission dated 08.10.2013 at page 263 of Volume 2 of the paperbook, which ought to have been considered. * It is clear that out of Rs. 72,92,00,682/-, a sum of Rs. 54,81,88,597/- was paid on reverse charge basis, which cannot be construed to be the income of the assessee. During the previ....
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....n submitted. The assessee had provided detailed reconciliation between service tax return and income in the profit and loss account in its additional submission dated 08.10.2013 before the DRP (refer page 263 Vol.2 of the paper book). Out of the total addition of Rs.72,92,00,682, it was submitted that a sum of Rs.54,81,88,597 was paid on reverse charge basis, which cannot be construed to be income of the assessee. During the relevant assessment year, it was claimed that the assessee had imported software amounting to Rs.54,81,88,597 and the same was considered in the service tax return under information technology software services for discharging service tax on reverse charges basis. This was claimed as an expenditure debited to the cost of goods sold (as part of trading segment) and the assessee has even deducted tax at source on the net payments. The brief write up of the accounting entry is available at page 317 and 318 of Vol.2 of the paper book. Evidences produced in this regard are enclosed in Vol.2 of the paper book. As regards the balance of Rs.18,16,12,085 though it was submitted initially that the same was on account of deferment of income, on further analysis reconcilia....
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.... charges as stated above. 10.5.4 As regards the technical and marketing support services are concerned, the assessee is remunerated at cost plus 5%. While in the service tax return, the entire amount of Rs.35,01,23,435 is reflected in the financial statement. Whereas under Income tax the cost is netted off with the expenses and only, the mark up portion of Rs.2,21,60,000 is reflected. This is evidenced by the profit and loss account and the disclosure in the notes of the account (refer page 433 and 434 of Vol.2 of the paper book). If the revenue from technical and market services is removed, the following scenario emanates:- Description Amount (in Rs.) Management, Maintenance or Repair Services 13,15,38,280 Erection, Commissioning or Installation Services 41,94,88,681 Information Technology Software Service 44,85,01,689 Revenue as per service tax return 99,95,28,650 Revenue from Installation and Others 114,58,80,000 Difference 14,63,51,350 10.5.5 Out of the above, the difference of Rs.14,24,71,202, according to the assessee, represents sale of certain expendable equipment / peripherals and accessories. It is stated by the assessee tha....
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....Court in the case of ABB v. IFCI([2006] 154 Taxman 512 (SC)), the Special Bench of the ITAT in Indus Ind Bank v. Additional CIT, and the Bangalore Bench of the ITAT in Hewlett Packard India Sales Pvt. Ltd. held that in the case of finance lease, the lessee is the owner of the asset and is entitled to depreciation. (c) The decision of the Supreme Court in ICDS Ltd. v. CIT [2013] 350 ITR 527 (SC) ("ICDS") is contradictory to the decision in ABB. Since ICDS was in the context of motor vehicles the same is inapplicable to the assessee. (d) The assessee should not have reduced the sale value of Rs. 5,89,52,591/- by adding the cost of Rs. 2,96,39,569/- 11.2 Aggrieved by the draft assessment order, the assessee preferred objection before the DRP. The DRP confirmed the findings in the draft assessment order relying on the judgment of the Supreme Court in ABB (supra). The DRP held that all risks and liabilities in respect of the asset stand transferred to the lessee whereas in the case of ICDS, ICDS was to remain the exclusive owner of the leased vehicles and therefore the decision in the case of ICDS is inapplicable to the assessee. The DRP further held that Circular N....
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.... rentals are concerned, the submission of the learned AR are as follows:- * The AO has brought to tax the entire principal portion of lease rentals amounting to Rs. 5,89,52,591 in the current year although the entire lease rental income does not accrue in the first year and the same ought to be taxed as and when they accrue over the lease period. * The lease is a cancellable lease at the option of the lessee (see clause 21). Hence, considering the entire lease rental as income accrued for the year and taxing the same in the current year is incorrect. * The AO has accepted that the interest component of the lease would accrue as and when the same is due, the same ought to apply for the principal component as well. Thus, the entire principal portion of the lease rentals does not accrue in the current year but accrues over the period of the lease. In this context, the learned AR relied on the following case laws:- (i) CIT v. Punjab Tractors Co-op Multipurpose Society Ltd. (1997) 95 taxman 579 (P&H) (ii) CIT v. Coral Electronics (P) Ltd. (2005) 142 Taxman 481 (Mad.) [para 2, 3 and 8). 11.4 The learned DR strongly supported the order....
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....eciation on assets under the Income-tax Act. 11.5.2 As mentioned earlier, the assessee-company had entered into a master lease agreement dated 14.11.2006 with General Motors India Private Limited (the lessee). Copy of the same is placed at page 1727 of Vol.5 of the paper book submitted by the assessee. On perusal of the same, prima facie, the following clauses demonstrate that the assessee is the owner of the asset, namely, i. Clause 10 - Right to inspect ii. Clause 13 - Right of assignment by lessor iii. Clause 17 - Damaged units to be replaced by lessee which shall be the property of the lessor iv. Clause 20 - Right to return of equipment v. Clause 21 - Cancellable at the option of lessee - early termination vi. Clause 25- right to repossess the equipment upon default. 11.5.3 The right to inspect, right to return of equipment were the salient terms noticed by the Hon'ble Supreme Court in the case of ICDS (supra) and it was held that the mere fact that the equipment could be transferred to the lessee at the end of the lease period for a nominal value would not take away the lessor's right to claim depreciation. The A.O. h....
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....e assessee / lessor is entitled to depreciation on the leased assets. Before concluding, it is to be mentioned that the judgment of the Hon'ble Apex Court relied on by the A.O. and the DRP in the case of ABB (supra) does not have application to the instant case. In the case of ABB, the issue involved was relating to "offences relating to transactions in securities" and not connected to Income-tax Act and the claim of depreciation, whereas, the facts in the case of ICDS (supra) is more similar to the facts of the instant case. Moreover, CBDT Circular No.2 dated 09.02.2001 has clearly mentioned that the claim of depreciation is dependant on the test of ownership. The test of ownership is discernible only on interpretation of various clauses in the lease agreement. 11.5.5 As regards the taxation of future lease rentals are concerned, we notice from clause 21 of the lease agreement states that the lease is a cancellable lease. According to the assessee, the A.O. has brought to tax the entire principal portion of the lease rentals amounting to Rs.5,89,52,591 in the current assessment year. We are of the view that the entire lease rental income (subsisting during the lease period) doe....
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....ncurred towards warranty to the extent of Rs. 24,76,00,000/- on the basis that no evidence was submitted. Further, the DRP confirmed the disallowance of provision for warranty of Rs. 57,39,66,000/- on the ground that the scientific nature of the creation of the provision was not established. Pursuant to the DRP's directions, final assessment order was passed. 12.2 Aggrieved by the final assessment order, the assessee has raised this ground before the ITAT. The submission of the learned AR as regards provisions for warranty are as follows:- a. The methodology followed by the assessee in estimating the warranty cost and tracking the relating expenses is briefly explained as under: (i) The assessee has a specialized warranty accounting team which tracks the incidents reported and associated cost of providing warranty services for each of the product; (ii) The total sales are divided into various categories of IT hardware products based on the warranty period attached to each such product. The faults are tracked on the basis of a unique identification number attached to each IT hardware so as to identify cases of faults; (iii) Thus, the warranty c....
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.... AR as regards disallowance of Rs.24.76 crore (expenditure on warranty) are as follows:- (a) Out of the total warranty expenses of Rs. 154.02 crores, the assessee had provided evidences for purchase of spare parts, technical support, labor and logistics support amounting to Rs. 129.26 crores. (b) Thus, details regarding approximately 85 % of the total expenses was furnished. Ignoring the fact that the data is voluminous and furnishing of 100 percent evidences was not possible, the AO has disallowed the difference amount of Rs. 24.76 crores. (c) In any event, details to the extent of Rs. 24,41,26,267/- was filed before the DRP vide submission dated 08.10.2013. The said expense pertains to freight payments incurred towards transportation of spare parts for warranty replacements. Details of the partywise payments made along with details of tax deducted at source is available at pages 541, 547 to 551 of Volume 2 of the paperbook. (d) Thus, the assessee has submitted evidences of approximately 99%. 12.4 The learned DR supported the order of the A.O. and the DRP. 12.5 We have heard rival submissions and perused the material on record. As regards ....
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....specified that the provision made was based on past history and was on scientific method of estimating liability on account of warranty claims. It is clear from the chart which has been extracted in the order of assessment that as and when the period of warranty expires, the assessee writes back the provision made in the books of account to the extent it relates to the warranty liability which the assessee does not incur and which was already provided by way of a provision and allowed as deduction in the past. It appears to us that the provision made by the assessee is scientific and is based on past history. We are also of the view that in view of the parity of basis of provision of warranty in AYs 2002-03 & 2003-04 and AY 2005-06, the ruling of the Tribunal in AYs 2002-03 & 2003-04 is squarely applicable to AY 2005-06 also. For the reasons stated above, we do not find any merit in ground No.3 raised by the revenue and accordingly the same is dismissed." 12.5.1 Similar view has been held by the Tribunal in assessee's own case for assessment year 2002-2003 and 20032004 in ITA Nos.362 & 363/Bang/2007 (order dated 18.03.2016). The relevant finding of the Tribunal reads as follows:....
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....he Tribunal in the above mentioned orders for assessment year 2002-2003, 2003-2004 and 2005-2006 after considering the method of providing for warranty liability by way of a provision, specified that the provisions made was based on past history and was a scientific method of estimating liabilities on account of warranty claims. For the relevant assessment year also, there are automatic reversals of the provision when products goes out of warranty period. For the purpose of estimating the warranty provision, the assessee takes into account only those units in respect of which the warranty period has not expired as on the date of estimation of provision. Accordingly, the system would automatically exclude those products for which the warranty period has expired and include only those products (i.e. products sold in past for which warranty period has not expired and products sold during the year with a warranty commitment) for which warranty period has not expired. Thus, based on the above accounting methodology, as the reversals get adjusted with the provision required to be created in the subsequent years, it, in effect, leads to the same being credited to the profit and loss accou....
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.... said order, the Revenue did not raise any ground on provision for warranty (copy of Hon'ble High Court judgment dated 09.11.2018 in ITA No.236/2018 is placed on record). In view of the aforesaid reasoning and following the orders of the Tribunal in assessee's own case for assessment years 2002-2003, 2003-2004 and 2005-2006, we direct the A.O. to allow provision for warranty as a deduction. It is ordered accordingly. 12.5.5 As regards the disallowance of Rs.24.76 crore (expenditure on warranty) is concerned, we noticed that out of the total warranty expenditure of Rs.154.02 crore, the assessee had provided evidence only for a sum of Rs.129.26 crore before the A.O. Accordingly, the balance sum of Rs.24.76 crore has been disallowed for want of evidence. It is stated by the learned AR that the assessee had filed the details along with the submissions dated 08.10.2013 for a further sum of Rs.24.41 crore before the DRP. However, the same was not taken note by the DRP. Accordingly, the issue of actual expenditure on warranty for the disallowance of Rs.24.76 crore is restored to the files of the A.O. The assessee shall cooperate with the A.O. and shall furnish necessary evidence for ha....
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....wards - grouped under "Operating and other expenses" in the Profit and Loss account; and Warranty services - classified under warranty expenses (ii) Certain expenses were debited under other heads like cost of goods sold, warranty etc. For instance, freight expenses incurred for purchase of goods forms part of cost of purchases and hence the same would be debited under cost of goods sold. Please see submission dated 22.01.2013 point 14 (page 4745 of Volume 10 of paperbook). Similarly, logistics/freight expenses incurred towards warranty spares would be part of expenses towards warranty utilization. (iii) It is submitted that out of Rs. 37,66,42,988/-, Rs. 9,95,36,401/- pertains to payments made towards freight inwards and accounted under "Cost of materials". The party-wise details of the said Freight inwards along with the details of TDS deducted on them were produced before the DRP which is available at page 641 of Volume 2 of paperbook. (iv) Further, the freight and other logistics costs of Rs. 24,41,26,267/- incurred for transportation of spare parts procured for servicing products under the warranty period, is part of warranty utilization exp....
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....d under other heads of profit and loss account. 12.2 The panel is of the option that this aspect has not been verified by the assessing officer in the draft order. Since the AO has not verified the same, AO is directed to verify the same and if the contention of the assessee is found correct, then the claim of the assessee is to be allowed. The assessee will produce all the necessary documents to show that tax has been deducted on all the expenses on which deduction of tax is required as per the Income Tax Act, 1961 and Rs.376,642,988 represents amount subsequently reimbursed and credited to freight account and also amount debited under other heads of profit and loss account. If the assessee fails to do so, the addition will survive to the extent of non-furnishing of evidence." 13.4.1 The A.O. in the final assessment order confirmed the draft assessment order by observing as under:- 14.7 Unexplained expenditure u/s 69C - Freight : At paragraph 7 of the draft assessment order a sum of Rs.37,66,42,988/* was added as unexplained expenditure u/s 69C of the IT Act. The assessee company has raised a grounds of objection that party wise list of TDS deta....
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....285, 4599 of Vol. 9 of the paper book. (d) Submission before the AO - dated 26.11.2012 - pages 5141, 5211 of volume 11 of the paperbook. 13.4.3 Therefore, in view of the directions of the DRP, which we are in consonance with, we direct the A.O. to re-examine the issue raised in ground 15 afresh. It is ordered accordingly. 13.4.4 In the result, ground 15 is allowed for statistical purposes. Addition of VAT refund offered to tax in other assessment years (Ground No. 16) 14. The brief facts in relation to the issue raised in ground 16 are as follows:- The assessee had set up a manufacturing unit at Sriperumbudur Hi-Tech Special Economic Zone on a land allotted by State Industries Promotion Corporation of Tamil Nadu Limited (SIPCOT). Pursuant to a Memorandum of Understanding (MOU) entered with State Government of Tamil Nadu, the assessee was entitled to receive refund of VAT on manufactured items sold from the facility at SIPCOT. During the relevant assessment year, the assessee had recognized an amount of Rs.93,70,89,776/- as income from VAT refund. The AO called for details of disbursements from the Joint Commissioner of Commercial Taxes, Chennai, according to....
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.... Balance Difference Nil (e) Since the VAT refund has been offered to tax over a period of three years, there is no loss of revenue and thus the same should not be considered as undisclosed income for the current year. (f) Even if the assessee were to revise its return of income and offer the same to tax for AY 2009-10, it had sufficient losses to setoff such income. Hence, there is no loss to revenue on account of the same not being offered to tax during AY 2009-10. (g) Without prejudice, if the aforesaid VAT refund of Rs. 43,77,219/- is being brought to tax in the current year, then the learned AO should give consequential benefit for the same in AYs 2008-09 and 2010-11 where the same has been offered to tax. 14.3 The learned Departmental Representative supported the orders of the Income Tax Authorities. 14.4 We have heard rival submissions and perused the material on record. During the relevant assessment year, the assessee had recognized an amount of Rs.93,70,89,776 as income from VAT refund. The assessee called for details of disbursement from the Joint Commissioner of Commercial Taxes, Chennai, according to whom the amount of Rs.94,14,66,995....
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..... It is stated that the said details were furnished to substantiate that the Company has been compliant in deducting taxes. However, according to the assessee, it had not claimed deduction of the same on the basis that it was capital expenditure. The nature of the payments was explained as under: (i) Sobha Developers - Rs. 11,58,28,028/- The amount pertains to payment made to Sobha Developers towards Civil construction undertaken at the assessee's Chennai factory. Though the amount was initially debited to the repairs and maintenance account, the same has been subsequently reversed and capitalized and thus no deduction has been claimed for the same. (ii) Firepro - Rs. 52,69,401/- The said payment pertains to payment towards installation of firefighting system in the factory at Chennai. Though the entries were initially debited to repairs and maintenance account, subsequently these were reversed and capitalised under buildings. The vendor subsequently, based on the negotiations, provided a discount of Rs.30,47,655/- to the assessee, which also the assessee recognized by reducing the capitalised value of buildings and recognizing a net fixed asset ....
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....bsp;Ledger extract of repairs and maintenance showing the debit as well as the subsequent credit entries are available at page 4909 of Volume 10 (reversal of Rs. 11,45,17,397/-). If at all, the addition should be limited to Rs. 12,15,631/- to the extent not reversed in the ledger, and consequential depreciation should be given thereon. (ii) Firepro - Rs. 52,69,401/- Though the expenses were initially debited to repairs and maintenance account, subsequently these were reversed and capitalized under buildings. Ledger extract of repairs and maintenance showing the debit as well as the subsequent credit entries for Rs.52,69,401/- and Rs.5,49,672/- respectively are available at page 4881 and 4882 of Volume 10. The vendor subsequently provided a discount of Rs.30,47,655/- to the assessee and accordingly the assessee reduced the capitalized value of building by recognizing the net fixed asset of Rs. 2,21,746/- as buildings. (Additions made during the year to Buildings available at page 5001 of Volume 10 of the paperbook) The AO has erred in stating that the discount entry passed in the repairs and maintenance has b....
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....r is to be allowed. Any expenditure claimed in the year under consideration will be capitalized and depreciation provided at appropriate rates. The assessee will produce all the necessary documents in support of its claim. If the assessee fails to do so, the addition will survive to the extent of non-furnishing of evidence." 15.4.1 The A.O. in the final assessment order has retained the addition by observing as under:- " 14.9 Disallowance of capital expenditure: In the draft assessment order a sum of Rs.11,91,80,698/- was disallowed as capital expenditure in paragraph 2. In this connection a detailed discussion has been made in the draft assessment order. The enquiries conducted, evidences gathered, show cause noticed given, reply of the assessee company and analysis of the assessee company were discussed elaborately in the draft assessment order. The DRP has considered the grounds of appeal of the assessee company at paragraph 13 of its direction. The assessee company has once again contended before DRP that such expenditure was already capitalized and not claimed as revenue expenditure. The DRP has considered their objection and directed ....
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....entries ought to have been offered to tax under section 41 of the Act and also for the reason that the evidence of tax deduction at source was not provided. The DRP confirmed the draft assessment order holding that an amount disallowed under section 40(a) in an earlier year could be allowed in the current year only upon demonstrating that tax was deducted at source. Thus, the addition as per draft assessment order was sustained in the final assessment order. 16.1 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the learned AR are as follows:- (a) The break-up of Rs. 9,14,02,219/- which was disallowed under section 40(a)(ia) in AY 2008-09 is as under: Sl No Particulars Amount disallowed under section 40(a) 1 Advertising 4,31,43,941/- 2 Contractor 1,77,46,263/- 3 Legal and professional 1,69,70,280/- 4 Freight Outwards 1,14,20,521/- 5 Repairs and maintenance - others 21,21,214/- (b) The assessee, based on mercantile system of accounting, makes a provision for various expenses which have accrued at the end of the year but where invoices are not received at the end of the year. Suc....
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....off, against the said provision for expenses." 16.3.1 The above additional ground is an integral part of the main issue raised in ground 18, hence, the same is admitted and taken for adjudication. 16.3.2 The assessee has also raised additional evidence. The document sought to be admitted as additional evidence are as follows:- "(a) Details of subsequent payments made to vendors and purchase orders written off in relation to Advertisement expenses amounting to INR 43,139,040, along with details of TDS, wherever applicable. Also enclosing sample copies of invoices in relation to the same. (b) Details of subsequent payments made to vendors and Purchase Orders Written-off in relation to Contractor payments amounting to INR 17,337,851 along with details of TDS, wherever applicable. Also, enclosing sample copies of invoices in relation to the same. (c) Details of subsequent payments made to vendors and Purchase Orders Written-off in relation to legal and professional expense amounting to INR 15,453,163 along with details of TDS, wherever applicable. (d) Details of subsequent payments made to vendors in relation to Freight Outwards expense amounti....
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....2014 (Revenue's appeal) 19. Six grounds are raised in the memorandum of appeal. Ground 1 and 6 are general in nature and no adjudication is called for, hence, the same are dismissed. The surviving grounds, namely, ground 2 to 5, read as follows:- "2. Whether the Hon'ble DRP is correct in sending back the issue of allocation of depreciated cost to the file of TPO with a direction to adopt the figure of Rs.2.99 as depreciation cost in trading segment. 3. Whether the Hon'ble DRP is correct and reasonable in not disallowing in payment for Microsoft Licenses ignoring the findings of TPO> 4. Whether the Hon'ble DRP is correct in upholding the objections of the tax payer relating to mark up on the warranty cost. 5. Whether the Hon'ble DRP is correct in deleting the disallowance of Forex loss of Rs.111,09,53,000/-." We shall adjudicate the above grounds as under. Ground 2 20. In ground 2, the Revenue challenges the DRP's direction to adopt the figure of R.2.99 crore as depreciation cost in trading segment. It is to be mentioned that in the final assessment order, the A.O. did not give effect to the above directions of the DRP. Therefore....
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....d from them at cost. During the relevant assessment year, the assessee reimbursed an amount of Rs.170,60,69,281. The details of which is provided at pages 5584, 5625 to 5627 of the paper book Vol.2. On the payments made as reimbursement, the assessee had deducted tax at source (refer pages 5558 to 5560 of the paper book Vol.2. The assessee had also paid Customs Duty on import of licences. The licences so procured by the assessee are used in the products sold by it. In absence of installing such licences, the product sold by the assessee cannot be utilized by the cutomers. Therefore, the usage of licences cannot be doubted. Allocation of cost is as per the usage and on the payment made, tax is deducted at source. In absence of any material, the TPO cannot determine an adjustment on the basis of mere conjecture and surmises. In any event, in an adhoc manner ALP cannot be determined at Nil. Moreover, the above transactions are undertaken by the assessee on a year to year basis and have not been questioned in any of the subsequent years by the TPO. For the aforesaid reasons, we reject ground 3. It is ordered accordingly. 21.5 In the result, ground 3 is dismissed. Ground 4 22. ....
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....y and that no evidence in support thereof was produced by the assessee. 23.2 Aggrieved, the assessee filed objection before the DRP. The DRP allowed the assessee's claim, relying on the judgment of the Hon'ble Supreme Court in the case of Woodward Governor India (P) Ltd. reported in 312 ITR 254 (SC), holding that the same was not a contingent liability and that the accounting treatment adopted by the assessee was only a timing issue. 23.3 The learned DR supported the order of the TPO. 23.4 The learned AR reiterated the submissions made before the TPO and the DRP. 23.5 We have heard rival submissions and perused the material on record. The net forex loss arising after set-off of the said gain on forward contract is as under: Nature of forex loss Amount (in Rs.) Gain on forward exchange contracts (5,26,74,967) Realised and unrealized forex loss (Net) - on settlement/re-statement of forex transaction 116,36,27,892 Amount claimed as deduction 111,09,52,925 23.5.1 The AO's observation that the assessee had not offered any gain to tax is ex facie incorrect. AS-11 requires a foreign currency transaction to be initially recognized using the exchange r....